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Hideo Tamura

【#1321】Questionable Advisability of BOJ’s Biased Approach to Rate Hikes

Hideo Tamura ／ 2025.12.10 (Wed)


December 8, 2025

　
The Bank of Japan led by Governor Kazuo Ueda is likely to raise the policy interest rate, or the benchmark for short-term interest rates, by 0.25 percentage points to 0.75% at its monetary policy meeting late next week. The purpose is to stop the yen’s depreciation. However, this is inexplicable. The impact of interest rate hikes on the foreign exchange market is minimal.

Poor contributions to correcting yen depreciation

The Ueda-led BOJ has raised the policy interest rate twice since the lifting of negative interest rates in March last year, warning that the yen’s depreciation would lead to price hikes. However, the rate hikes discouraged currency market players from selling yen only for short periods of time. This is because a small hike of 0.25 points in short-term interest rates cannot stop market players’ speculative selling of yen for dollars at a time when Japanese short-term interest rates are over 3 points lower than U.S. rates. While the Ueda-led BOJ has indicated the attitude of accumulating additional rate hikes to substantially narrow gaps between Japanese and U.S. rates, market players have responded by selling yen speculatively in anticipation of further rate hikes.

Interest rate hikes increase mortgage rates and corporate borrowing costs, pushing down domestic demand. While each interest rate hike remarkably improves bank profits, funds cannot circulate within Japan where demand for capital is shrinking. Massive surplus money will be invested overseas rather than in the crucial domestic economy. In such situation, Japan cannot be expected to recover from the “three lost decades.”

Harmonize monetary policy with fiscal policy

This is not the time for the Ueda-led BOJ to remain holed up in its fortress-like headquarters, endlessly debating rate hikes. Needless to say, the BOJ Act guarantees the independence of the central bank’s monetary policy management. However, the BOJ is obliged to share the nation’s policy goals. The fate of Japan’s economy now depends on the success or failure of the “responsible and proactive fiscal policy” advocated by the government of Prime Minister Sanae Takaichi. The BOJ should focus on harmonizing its monetary policy with Takaichi’s fiscal policy.

On December 8, the Takaichi government submitted to the Diet a large-scale supplementary budget proposal for general account expenditure worth more than 18 trillion yen. As well as tax cuts and other measures to counter price hikes, fiscal mobilization to expand strategic investment to enhance growth potential and economic security will not be limited to the supplementary budget but will continue seamlessly into the next fiscal year.

An obstacle to fiscal expansion is a rise in government bond yields. Main players in the Japanese government bond market are foreigners who have a market share of 30-40% and conduct speculative selling of government bonds to trigger a rise in government bond yields. In line with the “responsible” fiscal policy, the Takaichi government is reducing the scale of new government bond issuance from the previous fiscal year to control outstanding government debt as a percentage of gross domestic product. However, it falls short of keeping speculative government bond selling in check.

Here, only the BOJ can support the government bond market. Shouldn’t the central bank reconsider its policy of reducing its government bond holdings and flexibly intervene in the government bond market?

Hideo Tamura is a Planning Committee member at the Japan Institute for National Fundamentals and a senior correspondent for the Sankei Shimbun newspaper.